Entrepreneurs: Ignore The Political Noise And Focus On These 2018 Opportunities
We’re a few weeks into 2018, and it’s looking like another crazy year: the government has shut down already; controversy swirls around the Trump presidency; fighting continues in the Middle East; and nuclear tension with North Korea smolders. The national media seems like all-politics, all of the time. What is a sensible view of the outlook for the economy and the opportunities for entrepreneurs? What follows is a synthesis of predictions from commentators I respect.
The Economy. How much should we worry about a downturn as the U.S. economic expansion enters its ninth year with the stock market at record high levels? The Economist takes a cautious view of the stock market, noting that U.S. stock valuations (price versus earnings) are at levels not seen in the last century except on the eve of the Great Depression and the Dot-Com Meltdown. It concludes its 2018 outlook with a paraphrase of Dickens’ Micawber: “Something will turn down.”
Marketplace host Kai Ryssdal is fond of saying “The stock market is not the economy, and the economy is not the stock market.” Economic expansions end due to some combination of demand collapse, central banks raising interest rates sharply, or a general failure of business confidence and financial market liquidity.
On this basis the U.S. economy is positioned for, as the Economist put it, “good-ish [economic] times.” Major economies outside the U.S. are growing, which will create demand for U.S. goods and services, and the 2017 tax act will inject a large slug of demand into the U.S. economy. Europe is finally emerging from a decade-long slump and Macron’s election as President of France has re-energized the European Union. Japan continues to struggle but makes progress. China and India continue to grow much faster than the U.S., Europe, and Japan. Inflation is under control in all these economies. The U.S. economy shows no sign of over-heating: wages are barely rising in real terms and 3–4 million potential workers are still out of the labor force.
The biggest dark cloud in this blue-ish sky is political risk emanating from Korea and the Middle East: if missiles fly of oil supplies are interrupted, the calculus changes. The stock market takes news from these quarters calmly, however, suggesting that investors judge the risks to be modest, or perhaps they can’t really calibrate the risk and see no alternative but to carry on and bet the worst does not happen. This is sensible. Entrepreneurs can carry on building their businesses and pursuing the opportunities that strong U.S. and global economies create.
Disruptive Forces In The Economy. The internet revolution sails on, but the rebels have become the empire. Salesforce.com predicts that Google, Facebook, and Instagram (owned by Facebook) will control 2/3 of global digital advertising revenue in 2019. Facebook recently changed its news feed algorithm, demoting content from corporate sources including web publishers large and small. This put a large dent in hundreds of revenue plans. And the Trump administration has undone Net Neutrality, strengthening the already powerful hands of the telcos and cable MSOs that control most of the U.S. internet access market.
I suspect these companies are approaching a high-water mark, however, caused by their size/complexity and political authorities’ recognition, particularly in Europe, of their enormous power. In the past major tech monopolies have cracked in the vise caused by government pressure on one side and attack from smaller, nimbler companies with new paradigms on the other; government typically responds at about the same time that market forces are beginning to crack the monopoly. IBM, original AT&T, Microsoft (in the PC era), and Intel (in the mobile era) are examples.
For now, entrepreneurs should be prepared to find some toll gates on the road to success. However, these providers have created a mature and powerful infrastructure on top of which entrepreneurs can build additional value. Amazon Web Services, for example, has lowered infrastructure costs for software start-ups by an order of magnitude, notwithstanding it’s quasi-monopoly in cloud infrastructure.
Artificial Intelligence (“AI”) is the major rising wave of disruption. After decades of development, AI is starting to impact a broad range of businesses, and it creates threats. Some analysts believe that AI and robots could eliminate up to 50% of jobs in the next 10 to 20 years. The major tech companies are making huge investments in AI and aggressively hiring scarce talent. They and other major companies (e.g., health insurers) have proprietary data sets that are required to “train” AI systems. How much room does this leave for entrepreneurs?
AI applications are almost as diverse as the economy itself. Some are broadly-applicable platforms, such as voice recognition and language translation. Some are very specific problem sets, like diagnosing faults in a jet engine. And some are very big but quite specific markets, like medical diagnosis.
The major tech companies are building AI platforms on which more specific applications can be built. They are also building AI technology for major specific applications, e.g., self-driving cars. Much as Amazon Web Services enabled a generation of software entrepreneurs, the AI platforms have potential to enable a generation of AI entrepreneurs
For example, voice recognition has made “smart speaker” products like Amazon Alexa attractive: Alexa is now usable by most people. Alexa and similar products are driving the market for Internet of Things (IoT) in the home as people use Alexa to control smart lights, smart thermostats, and the like. IoT entrepreneurs are benefitting from Amazon’s AI-driven voice recognition platform. And entrepreneurs are developing strong positions in specialized AI markets. Gamelan Labs offers a service that streamlines a frequent data management problem: comparing two lists with entries that are similar but not identical and determining which are the same and which are unique. This problem arises, for example, when M&A requires companies to merge their customer lists: the same customer may appear in both lists with different profiles. Customers expect to be recognized when they call any part of a company, however, merging large customer databases by hand is slow and expensive.
For large vertical AI applications, like medical diagnosis and population management, large companies have advantages because they control the large datasets needed to train AI systems. But, large healthcare companies need help choosing the best AI technology and developing and applying AI applications. They often want to partner with entrepreneurial companies that can bring these skills and spark change. GNS Healthcare, for example is working with large health plans and providers to help them determine which of their clients (aka “patients”) will benefit most from proactive interventions to head off disease progression.
Crypto-commerce could be the next wave of disruption. Blockchains are a powerful technology that could disrupt a range of information-based businesses including banking. No one has yet built a major blockchain business but many are trying. And blockchain technology enables companies to create and issue money-like tokens such as Bitcoin. Many $ billion worth of these tokens have been purchased, although their long-term utility is yet to be fully determined. For now crypto-commerce is “a sporty game”.
The 2018 outlook for entrepreneurs is positive, despite the torrent of political noise. Some marks by which to steer:
- Expect strong demand this year in the U.S. and particularly European countries. Accelerate expansion of your market to Europe and beyond.
- Watch out for a dip in the stock market that depresses spending for major consumer purchases, but don’t expect it to depress the economy as a whole.
- Respect the power of the major web companies and the telcos. For now, they are having their way and will be able to price aggressively and make dramatic decisions in their own interest. Don’t base your business model on policies they can change overnight.
- Think through the impact of AI on your business in two dimensions. Dimension 1 is the potential to create value, especially for customers. Dimension 2 is the relative cost effectiveness different players enjoy creating that AI value: you, your competitors, and your technology and platform providers. Work out how important AI will be in your market and how to assemble the resources (in-house, partners, suppliers) needed to deploy it in the most cost/effective way.
Here’s to prosperity and growth in 2018!
First posted @ blogs.forbes.com/toddhixon on January 26, 2018.